Wearable Tech Won’t Power Up Accessory Manufacturers

For as long as personal computers have been on the market, there have been accessory makers churning out keyboards, mice and other add-ons.

But it was the age of mobile, portable computing that really whipped the accessory industry into a froth.

If you bought a PC, you only needed one keyboard and maybe a better mouse. However, smartphone and tablet owners often buy multiple cases, stands, screen protectors, ear buds, Bluetooth headsets, wireless speaker docks, spare cables, extra power adapters, battery packs and styluses — not to mention that keyboard. They want to customize their device, protect it and expand its capabilities.

But what happens if the next great thing is wearable technology[1]? Are consumers going to be piling on the accessories the same way?

Between the physical form factor of the upcoming devices, increased competition and a growing movement by technology manufacturers to offer their own accessories — like that clever Microsoft (MSFT[2]) Surface Touch Cover — it seems unlikely that the accessories party is going to continue at the same frenzied pace.

Zagg (ZAGG[3]) is a company that personifies the smartphone/tablet effect. Worth about 75 cents per share at the time Apple (AAPL[4]) first released the iPhone, Zagg aggressively went after the new smartphone market, producing everything from plastic film screen protectors to cases with built-in keyboards that effectively turn a tablet into a laptop. By 2011, ZAGG was hitting the $16 range, achieving more than 2,000% growth.

But last week, Zagg announced preliminary quarterly results that showed how brutal the current accessories market has become. It said it expected earnings to fall well below analyst projections and lowered FY 2013’s revenue projection, throwing ZAGG into a 15% tailspin that day[5]; shares currently rest below $5, off 70% compared its 2011 heyday.

If the smartphone and table markets are already getting tougher for accessory makers, the future doesn’t look that bright if wearable tech really does become the next big thing.

Take the smartwatch, for example. There simply aren’t a whole lot of opportunities to accessorize these things. The most obvious is the watchband itself, but companies like Pebble that are currently making the devices offer different bands as an option themselves. If smartwatch makers opt to use a standard wristwatch band, then every existing replacement watch band company on the planet could become a player. Heck, that could happen even if they have to offer customized fittings for compatibility.

Personal fitness devices like Fitbit also are a rapidly growing market, but the only real option for a motion tracker, heart rate monitor or other such gadget is a protective cover. And guess who makes those and often gives one away with every tracker sold?

Augmented reality glasses are making waves, with Google’s (GOOG[6]) Project Glass leading the way. But what’s a Zagg to do for glasses? Google is already experimenting with various frames, and the most likely outcome is that there will be a prescription frame option. Zagg is going to find itself up against Luxottica (LUX[7]) and dozens of other established brand-name eyeglass frame manufacturers if it wants a piece of the action — assuming Google even offers the option of mounting the Project Glass hardware on third-party frames.

In short, wearable tech is not only likely to offer fewer options for accessorizing, but it’s also liable to pit consumer tech accessory makers against the technology manufacturers themselves, as well as established companies that supply the “analog” version of the products (such as glass frame makers and watch band manufacturers).

The current worldwide transition from feature phones to smartphones is likely to take some of the sting out of the lack of opportunity to accessorize wearable tech (consumers spend $60 per device on average[8] to customize their smartphones, compared to only $30 on feature phones)x but competition is growing from cheaper manufacturers based in China. If you own an iPhone 5, you can pay $35 for a nice iPhone 5 case from Logitech (LOGI[9]) or $25 for one from Zagg, but there are thousands of silicon and hard cases for the device available on eBay (EBAY[10]) in the $1 bucket from Chinese suppliers.

And if wearable tech companies offering their own customization options and competition from cheap Chinese accessory makers weren’t enough to give Zagg, Logitech and others fits, there’s one last potential iceberg on the horizon.

3D printers might not be ready for prime time yet[11], but what happens when consumers can simply bypass accessory makers altogether and print their own cases and add-ons? Nokia (NOK[12]) has already released official 3D blueprints for its Lumia 820 smartphone[13] so that anyone with a 3D printer can churn out as many protective cases as they want and even customize them.

Bottom Line

There are plenty of ways to play emerging technologies, but stay away from tech accessory stocks.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.